Slower Eurozone Wage Growth Is Setback for ECB

Eurozone wages increased at a slower pace in the first three months of this year, despite a pickup in economic growth that has seen unemployment rates fall to eight-year lows.

That slowdown in pay growth will likely reinforce the European Central Bank's caution in the face of calls from Germany to remove its stimulus measures, since policy makers see a pickup in pay as essential to meeting their inflation target.

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The European Union's statistics agency Friday said wages in the first quarter of 2017 were 1.4% higher than a year earlier, a smaller increase than the 1.6% recorded in the final three months of last year.

The modest nature of the rise means wages lagged behind consumer prices over the same period, resulting in a drop in real incomes.

The number of workers without jobs has fallen steadily since the eurozone's economy returned to growth in mid 2013, and ECB President Mario Draghi said five million jobs have been created since the start of 2014. The unemployment rate has fallen to its lowest level since March 2009, a bigger accomplishment than it may seem because the proportion of the adult population seeking work has increased, in contrast to the U.S.

But in common with other parts of the developed world, that decline in joblessness hasn't translated into a pickup in wage growth.

The ECB has said that may partly be because workers are looking back to the very low rates of inflation that persisted in 2015 and 2016 and asking for only modest pay rises. That may change in response to a pickup in inflation earlier this year.

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But it has also said that the kinds of jobs being created may not be the same as those that were lost during the financial crisis and the eurozone's subsequent debt crisis.

"We have evidence that many -- it's hard to say what is the percentage, but many of these new jobs are so-called 'low-quality' jobs, where we're talking about temporary employment, we're talking about part-time employment," Mr. Draghi said in a news conference last week. "It may well be that this is actually slowing the growth of nominal wages."

The ECB's economists expect wage rises to pick up over coming years. In new forecasts released last week, they see wages rising by 2.4% in 2019 from 1.7% this year.

Higher wages can boost inflation in two ways. With more money to spend, workers can bid up prices of goods and services, while businesses paying higher wages often raise their prices to cover their increased costs and maintain their profit margins.

Without a sharper-than-expected pickup in wages, the ECB's economists don't expect inflation to hit policy makers' target of just under 2% through 2019. So while some German politicians want the central bank to start removing its stimulus measures, they are unlikely to get what they want soon.

In its annual review of the eurozone economy released Thursday, the International Monetary Fund said it sees little pressure for a change of course.

"Subdued wage growth and underlying inflation suggest there is a long way to go before headline inflation durably meets the ECB's objective," the IMF said. "Monetary policy should remain accommodative until there is a sustained shift in the inflation path."

Across the eurozone, there were some countries in which wages rose rapidly, but they were small economies in central Europe and the Baltic States where incomes are catching up with richer western Europe. In Germany, where the calls for an end to ECB stimulus are loudest, wages rose by 1.9%, a slowdown from 2.8% at the end of last year. And in Finland, where the economy has recently emerged from recession, wages actually fell by 1.6%, the first drop since the three months through June 2016.